After running Berkshire Hathaway for over 60 years, Warren Buffett will retire at age 95. But he’s not sailing into the sunset without making one last impressive investment. What makes his company’s most recent acquisition notable is its departure from their other recent sell-offs in various positions.
It was recently announced that the conglomerate would be purchasing OxyChem, a petrochemicals business, from Occidental Petroleum (also known as Oxy) for $9.7 billion. This transaction is noteworthy because it’s the most significant acquisition from Berkshire since 2022, and the move was made just ahead of Buffett departing as CEO.
GOBankingRates consulted financial and investing experts to gather insights into why this could be a genius move and what investors should take away from it.
Why Acquisition of OxyChem Is Brilliant
Here are the three main reasons why this deal is a brilliant move from Buffett:
1. Berkshire Got a Bargain on the Deal
“At about eight times OxyChem’s projected 2025 EBITDA, Berkshire acquired OxyChem at what Buffett considered a low price within an otherwise weak chemical industry, with peers like Dow selling at lower valuations,” said Kira Byrd, the chief accountant and co-owner at Curl Centric.
The entire industry is seeing lower earnings due to the same challenges that reduced profits for OxyChem. If the industry turns around as expected, the experts at The Motley Fool said Berkshire would be getting in at a bargain price. “OxyChem is a stable cash generator producing essential products including chlorine, caustic soda (sodium hydroxide), and PVC materials for use in water treatment, pharmaceutical applications, housing construction, and other industries that produce steady profits regardless of market conditions,” Byrd explained.
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2. The Deal Was Structured in Favor of Berkshire
“The genius here is with the structure of the deal and the resulting improvement in the balance sheet for both companies,” said Ryan McCallister, an operator, president and founder of F5 Mortgage. “Occidental Petroleum receives $9.7 billion in cash and announces plans to use some $6.5 billion of the money to get its debt below a critical $15 billion threshold. This greatly improves the balance sheet of OXY to reduce its overall risk and most likely save it $350 million to $400 million a year in interest payments alone.”
The Motley Fool noted the cash injection from Berkshire will be about $8 billion after taxes, with $6.5 billion going towards paying down debt and the other $1.5 billion going to Occidental’s coffers. Byrd noted Occidental’s debt reduction is enhancing Berkshire’s existing 28.2% ownership and adding another layer of protection against future energy price volatility through Berkshire’s other holdings, such as Lubrizol.
3. The Deal Is Self-Serving
The experts agreed this deal benefits Berkshire, as OxyChem will operate as a stand-alone business within the conglomerate while boosting Berkshire’s ownership stake, with proceeds used to pay down debt. “It’s genius. It’s certainly a win-plus for Berkshire because it also helps the company that they own 30% of,” said Doug Leggate, Wolfe Research energy analyst, in an interview with Fortune. He explained that the deal is self-serving and logical, but helpful rather than nefarious.
McCalliste elaborated: “Berkshire is trading some of its enormous cash reserves for a part of the business with extremely stable and predictable cash flow. OxyChem is a strong, consistent performer in the less volatile commodity chemical sector. “
What Can Investors Take Away From This?
Here are some lessons regular investors can learn from this transaction:
Invest in What You Know
“I view this as a sign of Buffett’s investment philosophy: invest in productive businesses rather than speculative technology during periods of high speculation in markets,” stated Byrd. Buffett is known as a proponent of value investing and allocating funds to businesses you understand. This is a clear sign, as Oxy is a company Buffett is familiar with.
“This purchase is a master class in value investing and risk management that every serious investor needs to study carefully,” McCallister added. “It’s much more than a purchase of a chemical plan, but a highly calculated and integrated move within a relationship Berkshire Hathaway already has with Occidental Petroleum.”
Focus on Long-Term Cash Flow When Making Investment Decisions
“For the investor, the key takeaway is to focus on the long-term cash flows and intrinsic values of businesses, just as Berkshire Hathaway does, rather than short-term market sentiment,” remarked McCallister. Instead of jumping on the rapidly growing AI-based stocks, Buffett stuck with what he knows by focusing on the business fundamentals of a company he understands.
You Have To Find the Best Options for Your Savings
As a regular investor, you should avoid looking for the hottest stock because you would be better off searching for opportunities where you can buy a cash-rich asset at a fair undervalued price. If you’re a proponent of this industry, this could also be the right time to invest in Berkshire Hathaway. With Berkshire using only $9.7 billion of its $340 billion cash hoard to acquire OxyChem, McCallister noted this move exemplifies Warren Buffett’s enduring philosophy of focusing on quality businesses with long-lasting earnings power.
“OxyChem is a fixed industrial asset that has fairly low maintenance capital outlays and can provide steady returns deep into the future,” McCallister concluded. “For the long-term investor, this is a much better place to invest nearly ten billion dollars than to leave it in low-yield cash.”
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This article originally appeared on GOBankingRates.com: Buffett’s $9.7B OxyChem Acquisition — Why Investing Experts Say It’s Genius